{"id":14095,"date":"2023-08-18T08:53:00","date_gmt":"2023-08-18T03:23:00","guid":{"rendered":"https:\/\/vajiramandravi.com\/current-affairs\/?p=14095"},"modified":"2025-04-02T09:53:16","modified_gmt":"2025-04-02T04:23:16","slug":"what-is-the-floating-interest-rate","status":"publish","type":"post","link":"https:\/\/vajiramandravi.com\/current-affairs\/what-is-the-floating-interest-rate\/","title":{"rendered":"What is the Floating Interest Rate?"},"content":{"rendered":"<h2><strong>About Floating Interest Rate<\/strong><\/h2>\n<p>&nbsp;<\/p>\n<ul>\n<li>A floating interest rate is an <strong>interest rate that changes periodically<\/strong>.<\/li>\n<li>The rate of interest <strong>moves up and down, or &#8220;floats<\/strong>,&#8221; reflecting economic or <strong>financial market conditions.<\/strong><\/li>\n<li>A floating interest rate can <strong>also be referred to as an adjustable or variable interest rate<\/strong> because it can vary over the term of a debt obligation.<\/li>\n<li>The <strong>change in interest rate<\/strong> with a floating rate loan <strong>is typically based on a reference, or \u201cbenchmark\u201d, rate<\/strong> that is <strong>outside of any control by the parties<\/strong> involved in the contract.\u00a0<\/li>\n<li>The <strong>reference rate is usually a recognized benchmark interest rate<\/strong>, <strong>such as the prime rate,<\/strong> which is the <strong>lowest rate that commercial banks charge their most creditworthy customers<\/strong> <strong>for loans<\/strong> (typically, large corporations or high net worth individuals).<\/li>\n<li><strong>How is floating interest rate calculated?<\/strong>\n<ul>\n<li>A floating interest rate <strong>uses a reference rate as the base.<\/strong><\/li>\n<li>In order to arrive at the floating rate, <strong>a spread (or margin) is added to the reference rate.<\/strong><\/li>\n<li><strong>Floating Interest Rate = Base Rate + Spread<\/strong><\/li>\n<li>Floating interest rates can be <strong>modified quarterly, half-yearly or annually.<\/strong><\/li>\n<\/ul>\n<\/li>\n<li><strong>Several factors tend to influence the calculation of floating interest rates<\/strong>. Some of the economic factors are,\n<ul>\n<li><strong>Repo rate<\/strong><\/li>\n<li><strong>Government\u2019s monetary policies<\/strong><\/li>\n<li><strong>Inflation rate<\/strong><\/li>\n<li><strong>Fiscal deficit<\/strong><\/li>\n<li><strong>Global and foreign interest<\/strong><\/li>\n<\/ul>\n<\/li>\n<li><strong>When is Floating Rate Relevant?<\/strong>\n<ul>\n<li><strong>While applying for a loan:<\/strong>\n<ul>\n<li>Typically, intending <strong>borrowers pick a loan with a floating rate when they expect a reduction in the interest rate<\/strong> or a dynamic rate through their loan tenure.<\/li>\n<li>Additionally, such an interest type <strong>enables individuals to make prepayments easily and pay off their debt faster<\/strong> <strong>and at a much lower interest burden.<\/strong><\/li>\n<\/ul>\n<\/li>\n<li><strong>While investing:<\/strong>\n<ul>\n<li><strong>Individuals can choose<\/strong> investment instruments with <strong>floating rates when they anticipate the base rate will be the same, or an expected change will be in their favour.<\/strong><\/li>\n<li><strong>Under such situations, the interest earned on investments<\/strong> made either <strong>stays the same or is likely to increase.<\/strong><\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<\/li>\n<li><strong>Limitations of Floating Rate:<\/strong>\n<ul>\n<li>The fluctuation of <strong>rate is beyond the control of both parties in a contract<\/strong>, namely \u2013 the lender and borrower in a lending institution setup.<\/li>\n<li>Similarly, <strong>investors and investment firms have to make their way around the fluctuations to generate earnings <\/strong>while cushioning their capital.<\/li>\n<li>Even the <strong>slightest increase in the interest rate can push loan EMI burden significantly<\/strong> for loan borrowers. It often makes the repayment process challenging and <strong>disrupts a functioning financial plan.<\/strong><\/li>\n<li>A <strong>small decrease in the interest rate generates a return on investment<\/strong> <strong>which is much lower <\/strong>than what one had anticipated before. As a result, <strong>investors may take a longer time to reach their respective financial goals<\/strong>.<\/li>\n<li><strong>Both borrowers and investors often find it quite challenging to manage their budget plan and regulate savings<\/strong> when dealing with a floating rate based financial or investment option.<\/li>\n<\/ul>\n<\/li>\n<\/ul>\n<p>&nbsp;<\/p>\n<hr \/>\n<h3>Q1)\u00a0What is Equated Monthly Installment (EMI)?<\/h3>\n<p>An equated monthly installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly installments are applied to both interest and principal each month so that over a specified number of years, the loan is paid off in full.<\/p>\n<p><strong>Source:<\/strong>\u00a0<a href=\"https:\/\/www.cnbctv18.com\/personal-finance\/home-auto-personal-loan-floating-interest-rate-fixed-emi-tenure-reset-change-rbi-guidelines-17568691.htm\" target=\"_blank\" rel=\"nofollow noopener\"><u>New RBI guidelines on floating rate loans: Borrowers could soon change tenure, EMI or move to a fixed rate<\/u><\/a><\/p>\n","protected":false},"excerpt":{"rendered":"<p>A floating interest rate is an interest rate that changes periodically.<\/p>\n","protected":false},"author":5,"featured_media":14096,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":{"0":"post-14095","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-upsc-prelims-current-affairs","8":"no-featured-image-padding"},"acf":[],"_links":{"self":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/14095","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/users\/5"}],"replies":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/comments?post=14095"}],"version-history":[{"count":0,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/posts\/14095\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media\/14096"}],"wp:attachment":[{"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/media?parent=14095"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/categories?post=14095"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/vajiramandravi.com\/current-affairs\/wp-json\/wp\/v2\/tags?post=14095"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}